Corporate tax in the UAE has become quite the hot topic lately—especially for businesses operating in free zones. Many people still ask, “Do free zone companies need to pay corporate tax or are they exempt?” Let’s clear it up in plain English.
Here’s the short answer: Yes… and no.
It all depends on what your company is doing.
The UAE introduced corporate tax in 2023 at a standard rate of 9% on net profits exceeding AED 375,000. But here’s the interesting part—free zone companies can still benefit from tax exemptions if they meet certain conditions.
So when is a free zone company exempt from corporate tax?
The UAE government allows a 0% corporate tax rate for qualifying income earned by free zone companies. But to enjoy this benefit, your company must:
- Be registered in a recognised free zone.
- Maintain adequate economic substance in the free zone.
- Earn only qualifying income (we’ll explain that in a moment).
- Not have elected to be taxed under the standard rate.
If you meet these conditions, your free zone company may continue to enjoy the 0% corporate tax rate.
What is “qualifying income” exactly?
This is key. Qualifying income includes things like:
- Trading goods within the same free zone or with businesses in other UAE free zones.
- Exporting goods or services outside the UAE.
- Providing services to businesses located outside the UAE.
But the moment your free zone company starts dealing with the UAE mainland market (outside of free zones), that part of your income might become taxable.
So if you’re a hardware trader in a free zone and start selling to mainland shops or contractors, the income from those deals may not be tax-free.
Can you split your income?
Yes, but it gets tricky. The government allows what’s called a segregation of accounts, meaning you can separate qualifying income from non-qualifying income. But you’ll need proper accounting, clear reporting, and annual audits to do this correctly.
Also, if too much of your income becomes non-qualifying, your whole business might lose the 0% benefit.
Should free zone companies worry about this?
Not if you stay updated and stay compliant. Many businesses are hiring tax advisors now just to be safe. The UAE tax authority has been clear—they’re not here to create a burden, but transparency and proper reporting are expected.
Final word
If you run a free zone company in the UAE, the good news is: you can still benefit from 0% corporate tax—but only if you follow the rules. It’s worth reviewing your income sources and getting professional advice.
Being prepared now means fewer surprises later—and a healthier business in the long run.
